BILL NUMBER: AB 1048	CHAPTERED  10/10/99

	CHAPTER   898
	FILED WITH SECRETARY OF STATE   OCTOBER 10, 1999
	APPROVED BY GOVERNOR   OCTOBER 9, 1999
	PASSED THE ASSEMBLY   SEPTEMBER 8, 1999
	PASSED THE SENATE   SEPTEMBER 3, 1999
	AMENDED IN SENATE   AUGUST 31, 1999
	AMENDED IN SENATE   JUNE 30, 1999
	AMENDED IN ASSEMBLY   MAY 27, 1999
	AMENDED IN ASSEMBLY   MAY 19, 1999
	AMENDED IN ASSEMBLY   APRIL 12, 1999

INTRODUCED BY   Assembly Member Firebaugh

                        FEBRUARY 25, 1999

   An act to amend Sections 1365 and 1365.5 of the Civil Code,
relating to common interest developments.


	LEGISLATIVE COUNSEL'S DIGEST


   AB 1048, Firebaugh.  Homeowner associations:  reporting.
   (1) Under existing law, unless the governing documents impose more
stringent standards, an association is required to prepare and
annually distribute a pro forma operating budget that includes
certain financial documents to its members.
   This bill would require an association to include in the pro forma
operating budget as a line item under cash reserves, the amounts of
funds received from either a compensatory damage award or settlement
from any person or entity for injuries to property, real or personal,
arising out of any construction or design defect, and to report on
the expenditure of those funds, as specified.
   The bill also would provide that in lieu of providing the
information described above with the pro forma operating budget, the
association may include the statement in the review of the
association's financial statement that is required by existing law
under specified circumstances.
   (2) Existing law prohibits the board of directors of the
association from expending reserve funds for any purpose other than
the repair, restoration, replacement, or maintenance of, major
components that the association is obligated to repair, restore,
replace, or maintain and for which the reserve fund was established.
Existing law authorizes the temporary transfer of money from a
reserve fund to the association's general operating fund under
specified conditions.  Existing law requires the board, if necessary,
to levy a special assessment to recover the full amount of any
expended funds.
   This bill would revise the definition of reserve funds for
purposes of the above described provisions to include funds received
and not yet expended or disposed from either a compensatory damage
award or settlement to an association for injuries to property
arising out of any construction or design defects.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:


  SECTION 1.  Section 1365 of the Civil Code is amended to read:
   1365.  Unless the governing documents impose more stringent
standards, the association shall prepare and distribute to all of its
members the following documents:
   (a) A pro forma operating budget, which shall include all of the
following:
   (1) The estimated revenue and expenses on an accrual basis.
   (2) A summary of the association's reserves based upon the most
recent review or study conducted pursuant to Section 1365.5, which
shall be printed in bold type and include all of the following:
   (A) The current estimated replacement cost, estimated remaining
life, and estimated useful life of each major component.
   (B) As of the end of the fiscal year for which the study is
prepared:
   (i) The current estimate of the amount of cash reserves necessary
to repair, replace, restore, or maintain the major components.
   (ii) The current amount of accumulated cash reserves actually set
aside to repair, replace, restore, or maintain major components.
   (iii) If applicable, the amount of funds received from either a
compensatory damage award or settlement to an association from any
person or entity for injuries to property, real or personal, arising
out of any construction or design defects, and the expenditure or
disposition of funds, including the amounts expended for the direct
and indirect costs of repair of construction or design defects.
These amounts shall be reported at the end of the fiscal year for
which the study is prepared as separate line items under cash
reserves pursuant to clause (ii).  In lieu of complying with the
requirements set forth in this clause, an association that is
obligated to issue a review of their financial statement pursuant to
subdivision (b) may include in the review a statement containing all
of the information required by this clause.
   (C) The percentage that the amount determined for purposes of
clause (ii) subparagraph (B) equals of the amount determined for
purposes of clause (i) of subparagraph (B).
   (3) A statement as to whether the board of directors of the
association has determined or anticipates that the levy of one or
more special assessments will be required to repair, replace, or
restore any major component or to provide adequate reserves therefor.

   (4) A general statement addressing the procedures used for the
calculation and establishment of those reserves to defray the future
repair, replacement, or additions to those major components that the
association is obligated to maintain.
   The summary of the association's reserves disclosed pursuant to
paragraph (2) shall not be admissible in evidence to show improper
financial management of an association, provided that other relevant
and competent evidence of the financial condition of the association
is not made inadmissible by this provision.
   A copy of the operating budget shall be annually distributed not
less than 45 days nor more than 60 days prior to the beginning of the
association's fiscal year.
   (b) A review of the financial statement of the association shall
be prepared in accordance with generally accepted accounting
principles by a licensee of the California State Board of Accountancy
for any fiscal year in which the gross income to the association
exceeds seventy-five thousand dollars ($75,000).  A copy of the
review of the financial statement shall be distributed within 120
days after the close of each fiscal year.
   (c) In lieu of the distribution of the pro forma operating budget
required by subdivision (a), the board of directors may elect to
distribute a summary of the pro forma operating budget to all of its
members with a written notice that the pro forma operating budget is
available at the business office of the association or at another
suitable location within the boundaries of the development, and that
copies will be provided upon request and at the expense of the
association.   If any member requests that a copy of the pro forma
operating budget required by subdivision (a) be mailed to the member,
the association shall provide the copy to the member by first-class
United States mail at the expense of the association and delivered
within five days.  The written notice that is distributed to each of
the association members shall be in at least 10-point boldface type
on the front page of the summary of the budget.
   (d) A statement describing the association's policies and
practices in enforcing lien rights or other legal remedies for
default in payment of its assessments against its members shall be
annually delivered to the members during the 60-day period
immediately preceding the beginning of the association's fiscal year.

   (e) (1) A summary of the association's property, general
liability, and earthquake and flood insurance policies, which shall
be distributed within 60 days preceding the beginning of the
association's fiscal year, that includes all of the following
information about each policy:
   (A) The name of the insurer.
   (B) The type of insurance.
   (C) The policy limits of the insurance.
   (D) The amount of deductibles, if any.
   (2) The association shall, as soon as reasonably practicable,
notify its members by first-class mail if any of the policies
described in paragraph (1) have lapsed, been canceled, and are not
immediately renewed, restored, or replaced, or if there is a
significant change, such as a reduction in coverage or limits or an
increase in the deductible, as to any of those policies.  If the
association receives any notice of nonrenewal of a policy described
in paragraph (1), the association shall immediately notify its
members if replacement coverage will not be in effect by the date the
existing coverage will lapse.
   (3) To the extent that any of the information required to be
disclosed pursuant to paragraph (1) is specified in the insurance
policy declaration page, the association may meet its obligation to
disclose that information by making copies of that page and
distributing it to all of its members.
   (4) The summary distributed pursuant to paragraph (1) shall
contain, in at least 10-point boldface type, the following statement:
  "This summary of the association's policies of insurance provides
only certain information, as required by subdivision (e) of Section
1365 of the Civil Code, and should not be considered a substitute for
the complete policy terms and conditions contained in the actual
policies of insurance.  Any association member may, upon request and
provision of reasonable notice, review the association's insurance
policies and, upon request and payment of reasonable duplication
charges, obtain copies of those policies.  Although the association
maintains the policies of insurance specified in this summary, the
association's policies of insurance may not cover your property,
including personal property or, real property improvements to or
around your dwelling, or personal injuries or other losses that occur
within or around your dwelling.  Even if a loss is covered, you may
nevertheless be responsible for paying all or a portion of any
deductible that applies.  Association members should consult with
their individual insurance broker or agent for appropriate additional
coverage."
  SEC. 2.  Section 1365.5 of the Civil Code is amended to read:
   1365.5.  (a) Unless the governing documents impose more stringent
standards, the board of directors of the association shall do all of
the following:
   (1) Review a current reconciliation of the association's operating
accounts on at least a quarterly basis.
   (2) Review a current reconciliation of the association's reserve
accounts on at least a quarterly basis.
   (3) Review, on at least a quarterly basis, the current year's
actual reserve revenues and expenses compared to the current year's
budget.
   (4) Review the latest account statements prepared by the financial
institutions where the association has its operating and reserve
accounts.
   (5) Review an income and expense statement for the association's
operating and reserve accounts on at least a quarterly basis.
   (b) The signatures of at least two persons, who shall be members
of the association's board of directors, or one officer who is not a
member of the board of directors and a member of the board of
directors, shall be required for the withdrawal of moneys from the
association's reserve accounts.
   (c) (1) The board of directors shall not expend funds designated
as reserve funds for any purpose other than the repair, restoration,
replacement, or maintenance of, or litigation involving the repair,
restoration, replacement, or maintenance of, major components which
the association is obligated to repair, restore, replace, or maintain
and for which the reserve fund was established.
   (2) However, the board may authorize the temporary transfer of
money from a reserve fund to the association's general operating fund
to meet short-term cash-flow requirements or other expenses,
provided the board has made a written finding, recorded in the board'
s minutes, explaining the reasons that the transfer is needed, and
describing when and how the money will be repaid to the reserve fund.
  The transferred funds shall be restored to the reserve fund within
one year of the date of the initial transfer, except that the board
may, upon making a finding supported by documentation that a
temporary delay would be in the best interests of the common interest
development, temporarily delay the restoration.  The board shall
exercise prudent fiscal management in maintaining the integrity of
the reserve account, and shall, if necessary, levy a special
assessment to recover the full amount of the expended funds within
the time limits required by this section.  This special assessment is
subject to the limitation imposed by Section 1366.  The board may,
at its discretion, extend the date the payment on the special
assessment is due.  Any extension shall not prevent the board from
pursuing any legal remedy to enforce the collection of an unpaid
special assessment.
   (d) When the decision is made to use reserve funds or to
temporarily transfer money from the reserve fund to pay for
litigation, the association shall notify the members of the
association of that decision in the next available mailing to all
members pursuant to Section 5016 of the Corporations Code, and of the
availability of an accounting of those expenses.  Unless the
governing documents impose more stringent standards, the association
shall make an accounting of expenses related to the litigation on at
least a quarterly basis.  The accounting shall be made available for
inspection by members of the association at the association's office.

   (e) At least once every three years the board of directors shall
cause to be conducted a reasonably competent and diligent visual
inspection of the accessible areas of the major components which the
association is obligated to repair, replace, restore, or maintain as
part of a study of the reserve account requirements of the common
interest development if the current replacement value of the major
components is equal to or greater than one-half of the gross budget
of the association which excludes the association's reserve account
for that period.  The board shall review this study annually and
shall consider and implement necessary adjustments to the board's
analysis of the reserve account requirements as a result of that
review.
   The study required by this subdivision shall at a minimum include:

   (1) Identification of the major components which the association
is obligated to repair, replace, restore, or maintain which, as of
the date of the study, have a remaining useful life of less than 30
years.
   (2) Identification of the probable remaining useful life of the
components identified in paragraph (1) as of the date of the study.
   (3) An estimate of the cost of repair, replacement, restoration,
or maintenance of the components identified in paragraph (1) during
and at the end of their useful life.
   (4) An estimate of the total annual contribution necessary to
defray the cost to repair, replace, restore, or maintain the
components identified in paragraph (1) during and at the end of their
useful life, after subtracting total reserve funds as of the date of
the study.
   (f) As used in this section, "reserve accounts" means both of the
following:
   (1) Moneys that the association's board of directors has
identified for use to defray the future repair or replacement of, or
additions to, those major components which the association is
obligated to maintain.
   (2) The funds received and not yet expended or disposed from
either a compensatory damage award or settlement to an association
from any person or entity for injuries to property, real or personal,
arising from any construction or design defects.  These funds shall
be separately itemized from funds described in paragraph (1).
   (g) As used in this section, "reserve account requirements" means
the estimated funds which the association's board of directors has
determined are required to be available at a specified point in time
to repair, replace, or restore those major components which the
association is obligated to maintain.
   (h) This section does not apply to an association that does not
have a "common area" as defined in Section 1351.
